SAP Faces Challenges Ahead

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News Analysis: Predictions of doom overlook positive signs for the company and its SOA strategy, some industry watchers say.

SAP has had its share of ups and downs recently. On Jan. 11 the company disclosed fourth-quarter and full-year earnings for 2006 that will miss not only analyst expectations, but SAP's own earlier predictions as well, when the full report comes out Jan. 24.

There's also a chance the company's CEO may not renew a contract that expires this summer, and some industry watchers are questioning SAP's SOA (service-oriented architecture) strategy and product release plans in a potentially slowing market for enterprise applications.

But the company's Enterprise Services Architecture strategy is just starting to pan outthe road map is scheduled to be completed in 2007 and SAP has products on the market. The company's partner ecosystem is exploding and there are signs that customers are adopting the recently released MySAP ERP 2005, the starting point for SOA, according to SAP's ASUG user group.

SAP's second-quarter 2006 earnings came up short as well, and this is the first time in seven years it's missed in the fourth quartera telling sign of pipeline activity for the first half of the next fiscal year. While some industry analysts have pointed to a weak dollar as the culprit in SAP's earnings woesan issue out of the company's controlothers believe there are bigger problems at hand. Various analyst research notes published Jan. 12 point to everything from a SOA strategy that could lead to less dependency on SAP's software to muddied product release plans, particularly with a new midmarket suite due this spring that SAP has provided few details about.

"In addition to more competition and likely pricing pressure from a reinvigorated Oracle, we believe SAP is poorly positioned to benefit from other, non-app-related growth areas in software, primarily SOA," Credit Suisse Analyst Peter Goldmacher wrote in a research note.

Challenges involved in SAP's SOA strategy including increasing market share and understanding about its road map (it's worth noting that SAP's biggest rival Oracle faces similar challenges with its Fusion Applications strategy; actual products aren't expected until next year) and building out its midmarket customer base to reach the self-imposed goal of a tripled customer base by 2010.

Aysin Neville, senior vice president and Global SAP Practice Lead at BearingPoint, said he believes SAP is on the right track with its SOA strategy, but that it needs to do more in 2007 to delineate the message.

"There is definitely a need and a push from our side and SAP's side, to adopt more of the platform. 2006 has been a good start but it's going to depend on SAP and their ecosystem partners to really push that out in 2007," Neville said, in McLean, Va. "I am not sure customers are really willing to [adopt the platform] unless they see business benefit, and I am not sure that was really articulated well. That is [in] SAP's plans for '07. I don't think it really happened in '06."

While a majority of SAP's nearly 35,000 customers are still on its older platform, more customers are committing to SAP's next-generation MySAP ERP 2005 suite, according to ASUG president Rod Masneyparticularly since SAP's announcement late last year that it would hold the core of MySAP 2005 steady until 2010.

"We're seeing very positive trends in upgrades globally. People are moving and getting [SAP's SOA] message," said Masney, who is also the global director of Infrastructure Services for Owens-Illinois. "A stable core to MySAP ERP is deemed as a positive. We're talking about the core of the business. Most customers run order-to-cash, accounts-to-reports, purchasing-to-pay and plan-to-produce processes in ERP. It is one of those areas [where] you want reliability, stability [and] predictability."

For ASUG's Masney, a move to MySAP ERP 2005 at his own company is under discussion. "We're on a global deployment of MySAP 2004. Stopping in the middle of an upgrade is challenging," he said. "But ERP systems are just like manufacturing. If you don't maintain them you don't get all the benefits. We are looking at things like components of NetWeaver for now, just trying to weigh [them] against our global rollout timing."

SAP's executive management team is potentially in flux this year. Henning Kagermann, CEO and executive board member of SAP, will see his multiyear contract expire when he turns 60 in June (under SAP's bylaws, multiyear contracts become annual contracts once an employee hits the 60 mark.) While SAP co-founder Hasso Plattner is expected in February to request a contract extension for Kagermann that will run through 2008a crucial period as SAP moves through its SOA transitionit's unclear whether Kagermann will accept.

Two executive board members, Leo Apotheker, president of global field operations, and Shai Agassi, president of the product and technology group, have been mentioned as possible successors to Kagermann, but industry watchers say neither seems ready for the job. Apotheker, analysts say, while he has a good handle on sales and marketing, has little in the way of technical expertise (Plattner is a techno-geek at heart, a sentiment that runs deep through the company). Agassi, they say, on the other hand, has a terrific grip on technology (and a close personal relationship with Plattner), but at 38 years old he is young and relatively inexperienced.

The challenges for the company come at a time when SAP is in the thick of probably the biggest technical and cultural shift in its nearly 30-year history, including a massive shift away from monolithic, closed applications to open, componentized, Web services-based applications with an underlying integration and development platform, NetWeaver. Late in 2006 SAP released MySAP ERP 2005, and it is currently working on an SOA-based suite for the midmarket, expected in March.

Given SAP's investment in its ESA road map, customer adoption is critical.

BearingPoint, for its part, said it hopes to lead the charge with SAP, particularly in the midmarket. The IT systems integrator plans to focus on the manufacturing, high-tech, consumer packaged goods (including retail) and life sciences sectors by building out industry-specific processes on top of SAP's All-in-One suite. In the enterprise sector BearingPoint will focus on aggressive marketing plans based around SAP's more traditional offerings - CRM (customer relationship management), PLM (product lifecycle management), human resources and business intelligence. "We do believe these areas are key to SAPkey to their revenue growthand this is what our customers are looking for," Neville said.

To encourage adoption around SAP's platform, BearingPoint is adding another eight composite applications to the two it already has on the market.

SOA Software, a Web services system integrator, is also upping the ante with SAP. The company recently joined SAP's Enterprise Services Community, and has achieved Powered by NetWeaver certification, despite deep relationships with Oracle, Microsoft, IBM and BEA Systems.

"The ESC community interests us because we work with other vendors loosely, but not as a communityothers have partner programs but not a community," said Roberto Medrano, vice president of SOA Software, in Los Angeles. "It provides a faster way to hammer out the definitions of requirements [for SOA] and a faster way to integrate with different vendors, so your products are service-ready."

But SAP still has the missed earnings report to contend with. At least one analyst described the numbers as reflecting the ebb and flow of the software industry. In his Enterprise Antimatter blog, Joshua Greenbaum, principal of Enterprise Applications Consulting, likened the SOA-based shift at SAP to a tsunami, and this past quarter's earnings shortfall to the low tide that signals that the big wave is imminent. "Customers want SOA and the other products and services that SAP can offer and the pent-up demand is building to a crescendo that might take another quarter or two to be heard," Greenbaum wrote.

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